Question
The following information was taken from the records of Silvergate Products for the year ended December 31, 2025.
| Item | Amount |
|---|
| Sales Revenue | $480,000 |
| Cost of Goods Sold | 288,000 |
| Salaries and Wages Expense | 74,000 |
| Rent Expense | 18,000 |
| Insurance Expense | 6,000 |
| Depreciation Expense | 21,000 |
| Interest Expense | 5,000 |
| Income Tax Expense | 17,000 |
Additional information:
- Accounts receivable increased by $12,000 during the year.
- Inventory increased by $7,000 and accounts payable increased by $5,000.
- Salaries and wages payable increased by $2,000.
- Prepaid rent decreased by $1,500 and prepaid insurance increased by $800.
- Interest of $5,000 was paid in cash. Income taxes payable increased by $3,000.
- Equipment was purchased for $30,000 cash. Borrowings of $10,000 were received in cash, and cash dividends of $15,000 were paid.
- Cash and cash equivalents were $24,300 at January 1, 2025.
Instructions:
- Prepare a multi-step income statement for the year ended December 31, 2025.
- Prepare a statement of cash flows for 2025 using the DIRECT method (IAS 7). In addition to the main statement, present a separate supporting schedule (working) for each of: Cash Received from Customers, Cash Paid to Suppliers, Cash Paid to Employees, and Cash Paid for Operating Expenses.
Statements in this challenge
- Income StatementIncome Statement
- Cash Flow StatementCash Flow
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 7 — Statement of Cash Flows
The direct method reports actual operating cash receipts and payments by category rather than reconciling from profit. Each line is built by converting an accrual figure to cash — revenue adjusted for the movement in receivables, purchases adjusted for the movements in inventory and payables, and so on.
Common mistakes
- Reporting the accrual amount unchanged because the related working-capital account happened to be given.
- Omitting a supporting schedule when the question asks for the workings behind each converted line.
- Producing operating cash flow that does not agree with what the indirect method would give — the two must reconcile.
Further readingDirect vs indirect method cash flow